DBRS Confirms U.S. Bancorp Senior Debt at AA; Trend Remains Stable

DBRS, Inc. (DBRS) has today confirmed all ratings of U.S. Bancorp (USB or the Company), including the Company’s Issuer & Senior Debt rating of AA. At the same time, DBRS confirmed the ratings of its primary banking subsidiary, U.S. Bank National Association (the Bank). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is AA (high), while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Issuer & Senior Debt rating is positioned one notch below the Bank’s IA.

The ratings confirmation and maintenance of the Stable trend reflects USB’s strong franchise, which includes a diversified mix of businesses, including substantial positions in payments and securities services coupled with regional banking and national wholesale banking. The ratings also consider the Company’s long-sustained peer-leading profitability metrics, ample deposit funding and liquidity, proven conservative credit culture and strong capital generation capabilities. As of March 31, 2017, Minneapolis-based USB had approximately $450 billion in assets and ranked as the fifth largest U.S. bank by assets, deposits and market capitalization.

USB’s earnings benefit from the diversity of its revenue sources, which provide for a substantial level of fee income (45% of revenues in 2016). Additionally, disciplined expense management, which DBRS views as a cultural strength, has helped offset building regulatory expenses and revenue pressure from the low interest rate environment. However, despite these headwinds, USB’s financial performance has remained strong. While not at pre-crisis levels, the Company continues to generate best in class returns, including a reported return on average assets (ROAA) and return on average common equity (ROACE) of 1.36% and 13.4%, respectively, in 2016. Most recently in 1Q17, USB reported a similar ROAA of 1.35% and ROACE and 13.3%. Although the Company’s efficiency ratio has crept-up to the mid 50% range, it also remains best in class. The Company expects to achieve positive operating leverage in 2017 as the regulatory and compliance expense build moderates in the second half of the year.

USB also has a strong track record in risk management indicative of a conservative credit culture, consistent underwriting standards, as well as a granular loan portfolio that is diversified among various industries and regions and lacks material risk concentrations in potentially higher credit-risk sectors. DBRS notes that the Company does have exposure to auto lending but has focused exclusively in the prime to super prime end of the market. USB’s nonperforming assets ratio was a modest 0.53% at March 31, 2017, with net charge-offs still below historical norms at 0.49% for 1Q17. Reserve levels remain solid at 1.40% of loans held for investment as of March 31, 2017.

USB manages its capital levels tighter than some peers although its strong and consistent earnings provide for robust capital generation and financial flexibility. In 2016, the Company returned 79% of earnings to shareholders in buybacks and dividends, consistent with its targeted range of 60% to 80%. Even with continued capital management activity and balance sheet growth, USB maintains ample capital levels, which increased modestly year-over-year. As of March 31, 2017, USB reported a Common Equity Tier 1 (CET1) capital ratio under the Basel III fully-implemented standardized approach of 9.2%. The Company recently announced that the Federal Reserve did not object to its most recent capital plan as part of the 2017 Comprehensive Capital Analysis and Review process. The capital plan includes an expected 7.1% increase in its common stock dividend and $2.6 billion in stock buybacks. Additionally, reflective of its strong level of deposit funding, average deposits represented approximately 120% of average loans and the Company currently exceeds the fully-implemented LCR requirement.

RATING DRIVERS
Given USB’s very high rating level, DBRS believes upward ratings momentum is unlikely. Conversely, negative ratings pressure could arise from a sustained material decline in profitability or a significant increase in risk appetite or asset quality deterioration.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Global Methodology for Rating Banks and Banking Organisations (May 2017), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents, SNL Financial and the Federal Reserve. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: John Mackerey, Vice President – Global FIG
Rating Committee Chair: Lisa Kwasnowski, Senior Vice President – Global FIG
Initial Rating Date: 4 April 2005
Last Rating Date: 13 May 2016

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.